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Relevance of Banking - Financial economy to Network Economy

Can banks transform themselves to remain relevant both in the financial economy and for the network economy?

Traditionally, the role of the banks have been to be collect money from people who have money, aggregate the same and loan out the money to people who needed it. The banks were needed as there was no way that people who had money could know about other people who needed the money. Also, banks could assess the risks associated with the loans and cover the risk by way of lower, but guaranteed returns on income for people who deposited cash with the bank. The profits for the bank primarily came from the difference between the interest paid and the interest earned.

That condition has changed with the emergence of technology. This has been proven by companies like kickstarter where the people who need money set-up online profiles and people who have money can find the people whom they would like to give away or in some cases lend their money for something in return (could be cash or kind).

Still banks are acting as if their environment hasn’t changed.

Now, in order for the bank to provide guaranteed returns to their customers and to protect their profits, the banks generally avoid giving out unsecured or medium to high risk loans.

Now if the banks can create an online platform where, all the loan applications that the bank wants to refuse are listed, with all the relevant information. Access to this platform is provided to any customer who wants to be an investor. These investors can then see these loan applications, access the risk potential and then decide if they would like to take the risks and approve the loan. If they do, the bank then charges the amount from the investor and provides the loan to the applicant and on what terms (rate of interest, duration of the loan, collaterals, etc).  The contract could be between the investor and the loan applicant, where the bank becomes a mediator. The bank can charge a fee to the applicant and the investor for providing this service.

This will help everyone involved. The investors have the potential to earn a much higher return for their savings in the bank; loan applicants who are willing to pay a higher interest in return to a loan that is made available to them (which otherwise they cant get) and the bank my derisking their portfolio and at the same time increasing their profitability.

The banks can also start creating credit ratings for both investors and the loan applicants which they can then use for subsequent transactions.

Also, if the product or service is successful, the bank can start doing this for all loan applications and hence totally de-risk their business while continuing to be profitable.

Do you think this is a feasible idea? Do share your thoughts so that we can discuss this further.

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Comments: (1)

Mukesh Gupta
Mukesh Gupta - SAP India Pvt ltd - Singapore 31 August, 2013, 04:35Be the first to give this comment the thumbs up 0 likes

Another thing that the banks can do is to connect their various customers and enable commerce between these customers. This opens up another source of competitive advantage for the banks. If done well, this can create a viral growth as the value of the network will grow exponentially with every additional node and will become more and more difficult to break this network --> Sustained competitive advantage for the bank that gets this right the first time. 

 

Mukesh Gupta

Director

SAP India Pvt ltd

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20 Feb 2013

Location

Singapore

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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